Transcription
This is about being short the behavior of your of your government. I mean, if you think they're going to be disciplined [music] and they're going to look after you and they're going to raise rates above inflation and give you a real return on your cash, then don't do it.
But if you, like me, are less confident that that's the case, that the history of money tends to suggest one thing, which is you're better off owning gold and and or silver versus your local currency. By the way, the producers have never been cheaper than they are today ever. So, while they have gone up, um there has been actually been negative float this space over that time frame, as amazing as that may seem to you. So, these are the most profitable companies in the world, 50% free cash flow margins, making making probably double and in some cases triple the free cash that tech is making.
I think the Trump Fort Knox thing is is related. So, so exp- expand on that for me. Well, I mean, those of us in the gold community think think that quite a long time ago the gold was moved elsewhere anyway, um and that Fort Knox is a bit of a shell game. There's not much going on there. Hasn't been for a long time. So, should he go there and open it up and be proven right, which I'm sure President Trump would quite like to be proven right, um seems to be one of his favorite things, then you would have the condition that the ECB warned about in their research note and and I've been inferring, which is people get but wait a minute, where's my gold? And if you're uh a rich oligarch and you ring up your Swiss banker and go, "Where's my gold?" And they go, "What do you mean?" Um you know, you have a sequence of events there which results in a much higher gold price.
>> Welcome to The Master Investor podcast with me, Wilfried Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes.
My guest today, Ned Naylor-Leyland, is the manager of the Jupiter Gold and Silver strategy, which sits with the nearly $3 billion of assets under management. And just last week, he won the Investment Week Fund Manager of the Year award for precious metals funds. Ned has been consistently bullish on both gold and silver for a long time, not just popping his head up now as both metals shine bright. Ned, it is a delight to welcome you to the podcast, and congrats on the award last week.
>> Well, thank you very much. Um it's always nice to be recognized. Um but moving on swiftly from the award, thank you for having me on.
>> Very convenient timing. This has been set up for ages. I didn't know the awards were last week, so it's it's really worked out well that we have this manager of the year with us freshly crowned. Um let's get into the very simple specifics first of all. What is the long-term case for gold?
>> So So the The unfortunate thing, Wealth, is this topic is not well explained to investors. Um gold is the risk-free of the the system, always has been, but things changed dramatically in um well, in the '70s and '80s, but I I would tend to say more importantly when Volcker took rates to 20%, we entered a a system where US Treasuries became the risk-free of the financial system formally, while gold operates in parallel alongside that. But the But the the true answer to your question is it's going to maintain your purchasing power. So the case for gold is you want to save and not lose purchasing power, you own physical gold. That's what that's for. That's why central banks have huge amounts of it is intuitively the public recognize what gold is. They don't necessarily know how to explain it, but the central banks know exactly what it is, which is the truest free of the of the system.
>> Has that always been the case for gold? Or I guess put another way, has that particular case to protect your purchasing power gotten a lot stronger in the last couple of decades?
>> No, no, it's always been it's always been That's why there's That's why there's that phrase, "An ounce of gold buys you a handmade suit and a handmade [clears throat] pair of shoes." It always has done. It's It's the thing that's measuring everything else. Now, of course, what that also means is that if you're thinking about the gold price, and you're watching it going up. And by the way, I still do that on my screen. But that's that's just not how it works. Gold is measuring the loss of purchasing power of your your local currency. I know that's not something new. I mean, that's That's always been the case.
>> So, almost you're saying we should the reverse of that is you should watch it against every single paper currency, not just against the dollar.
>> Well, you should So, this is one of the difficulties here is that you you should be thinking about your local currency in gold terms. And yes, you can you can sort of have gold zero and watch all the different currencies going down. The The problem with it is if you're Let's say you're a Turkish barber in Istanbul. You don't have much knowledge of the financial system and no interest in it. So, you only think in in Turkish lira terms. So, you're you're owning gold because you're worrying about the the loss of purchasing power of of the lira. But there's a a secondary component here, which of course is that the dollar is the the local currency of the financial system. So, people talk about the gold price. They're just talking about the cross rate between dollars and gold, but it's because the dollar is the the local currency of the financial system that people think about it that way. But But yes, I mean, gold just is measuring the speed at which you lose purchasing power. So, the first gold that I ever bought was 2001 and on the basis of CU, I had a an updated look and I think it's up 17 times since I bought it. And considering the FTSE has doubled over that timeframe, almost all of which is in the last 3 years, to give you an idea of where I'm going with this topic.
>> I got I wonder what the S&P 500 has done in that period.
>> more, but nothing like nothing like nothing like that, no.
>> Um what's the long-term case for silver?
>> So, look, gold and silver are both foreign exchange. So, they trade together. They'll move together. The the directional correlation is perfect. Uh silver has high beta. So, if you if you like if you want to be short governance, short politicians, short um their ability to defend your purchasing power, silver's a way to do this with more more beta. But, the way I like to describe it is silver is like gold, so you're short politicians, um but you're also long the future because it's it's in very very short supply. There's a big problem with the supply-demand uh structure of silver. So, you're long green tech tech, the military, everything really that's running the modern economy, but you're also short politicians. So, silver has a nice dual filter.
>> Why do you stop at those two precious metals and not the others?
>> Because they the precious metals uh nomenclature on its own is completely unhelpful. It's a is a is a really completely unhelpful uh terminology because you have monetary metals, which are gold and silver. They trade in the foreign exchange market. They're money. They are foreign exchange. These other things are not, you know, the idea that platinum and they they have no relationship whatsoever to the monetary system. Gold and silver are are money. They are foreign exchange. Whereas, these other things are industrial, expensive industrial metals.
>> With silver, obviously, you're were alluding to it being a metal of the future. It has a It has a use. So So, why not other non-precious metals?
>> Well, because
>> Like copper or
>> Yeah, because the bullion and banking system is is um is very short gold and silver. So, in other words, there's a fractional reserve uh structure to the gold market and the silver market the same way there is for your cash, which which is so reinforcing this point that they're money. You know, I'm not saying that that these other things aren't interesting, and I'm sure that there's lots of bull cases and some metals in particular look very interesting, nickel being one of them. But, these things are tied to the economic cycle. So, if you're long any kind of raw material or commodity, the price you're paying today assumes a a an optimistic and linear outcome for the global economy. In fact, growth. Uh you're paying for that already. Whereas, with gold and silver, it's not like that. You're kind of the other way around, particularly as the price of gold and silver are principally driven by real interest rates, that that when things start to go wrong, generally uh the market gets more dovish. So, so that's your driver. It's not the same as being you you really you're kind of short rather than long, whereas you're long with commodities.
>> Mhm. And And obviously, your your strategy focuses on both gold and silver, not the others, and it earns the underlying plus uh equities, and we'll come to to that strategy in a moment. This episode is sponsored by BNY Investments. BNY Investments is part of BNY, a global financial services company supporting investors and institutions around the world. This sponsorship does not constitute investment advice. This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, provided market-leading research to help investors understand gold's role and modernize how gold is owned, traded, and used, developing industry standards and market infrastructure. Learn more at goldhub.com.
First, dwell for me on what drove them. You mentioned real interest rates there as a a driver behind the scenes for all of this, but what drove the enormous gains of 2025?
>> Yeah, so not what people think. Um, so what people will say to you is central banks um, and or some kind of geopolitical premium. This is just not how it works at all. It literally has nothing to do with that. And we can go into depth into that if you want. It was trend following. It was it was absolutely trend following. Uh, the dollar gold price broke out to an all-time high in April 2 years ago. And it just entered a massive trend following move. So this is uh, leverage capital. This is traders, um, CTAs, hedge funds all jumping in and and going long. The number one way to play debasement. So so, you know, it's been a year and a half or 2 years where your macro trader has been been focused on debasement. Of course, they ended up getting quite badly wrong in Q1 because we entered a um, a strange tightening in real rates environments through the Iranian crisis. But yeah, it's been trend following and not investors. In fact, um, long-only investment capital has been entirely absent the entire way through the rally. It's just been parked in in tech, double tech, and triple tech, as I like to call it. Um, and has not participated. You can see that in lots of ways. It's it's yet to join in. I think that will change at some point. Um, probably when your traditional portfolio doesn't look quite as rosy as it does at the moment, there'll be more incentive to want to switch. But yes, it was a trend-following move.
>> That's really interesting. So, does that in any way undermine the argument that these two assets are there to protect your long-term purchasing power if it ends up being more of a a trading volatile asset in that regard?
>> Mhm. No, I would push you back to think about your your your Turkish friend. Uh what he What would he say? You know, you're thinking about it again. You're thinking about it returning dollars. Uh whereas for the average person around the world, they're thinking about in local currency terms. So, there's no trend following there. It's the US dollar gold price that's caught up with gold in sterling and and yen and and Turkish lira. And yes, that was accelerated using using leverage. But no, that doesn't undermine the case at all. And And the bigger picture here, of course, as well is And there's a quite interesting ECB research note about this actually last year, that there is a um a point to be made with regard to where is the gold? Who has the gold? I'm super interested in that topic. I think that people don't spend enough time thinking about um um unpriced risk. I I I And frankly, if you become a gold bug, that's kind of what you where where you park yourself anyway. But But that But all of that still lays undiscovered by the investing public. So, no, I I don't think the trend-following point is a problem. And by the way, it's all come out. So, now you don't have either in. You don't have either cohort actually in at the moment. Neither the trend follower nor the investor.
>> Um I want to come to that where is the gold in in a moment. But just dwelling again on this big surge that we saw last year, you know, 5,400 or so that we got to in the US dollar price of gold, as you'd put it. Fair to say then that that was a a short-term exaggeration to the upside? We we've obviously pulled back significantly to the low 4000s from that.
>> So So look, I I I I go back and say remember what you're doing you really is we're talking about what happened to the dollar versus gold. So was it an Was it an overreaction to the downside for the dollar versus the risk-free? I'd say no, um but I but I would say that that leverage wasn't an the overarching driver in both directions. This is also why you had a a 10% sell-off for the US dollar gold price in one day. You know, people still talk talk about it being something to do with central banks. And my comment is what? So that was central banks selling 10% in a day? You know, what what what we have to accept is that is that almost almost everything in the financial system now is financialized in one way or or another and derivatives and leverage are a very important part of price discovery. So did the dollar get a bit oversold? Maybe. Um I'm not sure though. I mean I think that that the one of the things to accept why hedge funds and why macro investors are thinking about debasement is because while the curve is giving you an idea of what the bond market feels about the Fed's behavior and and guidance, they also know that there's extra weaponry. Think about it like a American football team with a whole bunch of very large linebackers still on the bench and they haven't come off yet. They're all dovish. And the market knows that. So sure you could always a bit overextended, it's this additional dovish weaponry which is available to policy makers, which makes the sort of the thoughtful macro investor go guys, you know, this is coming at some point. So whether that's more QE, whether it's yield curve control, whether it's intervention at the Fed, all of this is not in the price. Just like this problem of where is the gold is not in the price. So it's it's a it's a layered topic.
But but just let's we'll talk about the Fed in a second, but in terms of it not being in the price, I guess you've acknowledged that the institutional investor is priced in the fear of in- debasement already, if that's what was driving it last year. But, you're saying that the retail investor or the average portfolio hasn't yet done so. Is that fair?
>> Yeah, I'm I'm not sure how we pick about institutional, but um I think that that the the the leveraged investor, whether it's a hedge fund or or an individual trader, they like to have a run at thematics. Now, yes, for a period there, it was in the price. And then through a process of deleveraging, there were sort of two deleveraging events in in January and late January and March. Um they're out now. So, like I said you earlier, what the interesting point now is there was no long only capital in at all, and there really hasn't been. In fact, the total amount of physical gold held by the exchange-traded bullion products is below where we were at $1,900 an ounce 6 years ago. There's just no participation at all from long only. They're not doing it. They're they're off doing other things. Um and and yes, it was your your your trader that ran that, but they they've been thrown out of that due to the fact that obviously we had this rather odd situation where the cuts I mean, it's not that long ago that maybe 9 months ago that we had seven cuts priced in. And now we're at a hike. And meanwhile, 1-year forward inflation expectations have barely moved at all. I mean, they're almost exactly the same. So, you've you've deleted seven cuts and now we're at a hike, and yet forward inflation expectations haven't moved, and this explains how and why those leveraged um positions got blown out. Um because they were very much on the cutting the dovish uh view of the world, and and now they're not.
>> Let's talk a little bit then about central bank action and and start with the Fed for obvious reasons. What did you make of Kevin Warsh's first press conference last week and how much of a a change are we looking at?
>> Look, I'm not an expert on that. I did watch it. Um I I thought that he did a good job of speaking out of both sides of his mouth, which is the job of the Fed chair. Um I I tend to think that he is more dovish than the market has accepted so far or is or is positing. I think that he already discussed how the inflation metrics are constructed and there was an inference of potentially that the neutral rate is higher than where we are now. All of that is structurally dovish. Um so, look, I I think one presser probably isn't enough to tie oneself onto that. Uh I think he's an interesting character. But, you know, the Fed chair's job is to keep people in the water. Um and maintain a a nice bath temperature.
>> What do you watch more in terms of say the the next year of his actions? Is it the interest rate? Is it the balance sheet? And how big a swing factor do you think either could make to gold?
>> I don't think that the balance sheet is something that the that the wider investment market looks at or cares about very much. People like me do, but I don't think that's really something which the the average investor pays that much attention to. Yeah, I think rates, obviously, is extremely important. You've got this problem with this monumental interest bill, which which would tend to require a lot of cuts, which I think is why your macro investor is positioning for that for so long. So, look, I think it's about the rate side. Um
>> But on the balance sheet, if you if we listen to what he said, hm, you know, clearly had to say what he needed to say to get nominated and that might imply more rate cuts than hikes. But he was pretty clear throughout on the balance sheet, him and Scott Bessent, that long-term structurally they want to reduce the balance sheet.
>> Sure. I mean, I suppose that then you can ask yourself, are are is the Treasury Secretary and the and the Fed chair, are they are they politicians? I mean, in my view, absolutely. I mean, the idea of independence in my view is is rather fanciful. These people say one thing and do another. I mean, I think I think the history of the monetary system tells you when you get to where we are now, the idea that you're contracting anything is um I mean, it could happen, but I think it would be strange.
>> Mhm.
>> Um and an improbable outcome. You know, we are we are very, very late stage of this monetary cycle. And the central bank's balance sheets are the thing that are not priced into anything. So, when when I look at uh when I talk about academic studies about gold, because of course investors love looking at backward-looking data. Ooh, you know, this period this and whatever. There are lots of studies that suggest you have 25% in in gold in your portfolio for the best uh adjusted return over backward-looking periods. But, of course, central bank balance sheet expansion is not in there. And that's the whole thing you're trying to hedge through this function. So, look, I think that um let's wait and see. Let's wait and see, but the idea that that that there'll be a genuine pullback in the scale of central bank balance sheets is in in my view unlikely.
>> Hi guys, it's Wealth. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five-star rating and leave us a comment. It really helps other people find the podcast, too. Now, back to the episode.
>> Let's talk a little bit about its correlations with with other assets. What correlations do you watch? What what what matters to you about how gold is trading?
>> I don't I don't look at um gold in that way. Um I think it's it's it like I said to you, it's the risk-free. It's the thing that's measuring other things. So I I I don't really look at it in terms of that kind of correlation. Uh I think it's clear that people get overly um uh focused on the concept of risk-on, risk-off or what's a risk asset, what isn't. Um and then they sort of say, "Oh, gold's not behaving the way it is." Because they're not understanding that it's real rates and the changes in real rates expectations that's driving the change in price in your local currency. So I look I'm not that focused on correlation. The other thing of course to remember is well, if I'm I'm long only. So while I love all the macro stuff and I spend lots of time thinking and talking about it, it's not really driving my behavior on a day-to-day basis.
>> Mhm. So just dwell on on real rates then in the start of this year because based on that sort of risk-on, risk-off sentiment, some people thought, "Oh, a war's broken out. Why is gold falling back?" Talk us Talk us through
>> Well, it's it's what I said to you, which is that um one year forward inflation expectations, which is half of your real rates picture, didn't move. Yet, we lost the cuts and trending into a hiking environment. So that is a a dramatic change in real interest rate expectations in a negative sense for gold. Really though, what that is is a kind of bounce and a breather for the dollar relative to the risk-free. That's really what it is. It's just a It's just a pullback in an air pocket. Now look, it should that continue. So it's all over in the Middle East. Um whether it is or it isn't is a a totally different point. But if it is all over in the Middle East, and then and then the market continues to price in more hikes, that would tend to infer further weakness for the US dollar gold price short term. but of course for lots of structural reasons it's very difficult to keep that that position, um, not least of which that interest builder we discussed.
>> Um, in terms of the comparisons, and it's interesting you don't look at this, but at the start of the year a lot of people were pointing to the relationship between gold and and Bitcoin. And that the ratio between the two, which, you know, can can indicate buy moments or sell moments got very stretched. Do you think gold and Bitcoin can be compared as alternatives for each other or not?
>> No. Um, Bitcoin is a is is now, um, a sort of part of the the leveraged tech sphere. It's it's a it's a traded asset. It's very full of speculative capital. Good, the gold is completely empty of that. Uh, and it the while you you know, you you know, you'll see some correlations here and there. There's no causation within it whatsoever. It's not a, um, they're not it's not a foreign exchange instrument in a practical way. It's not used as money. I think that Bitcoin is extremely helpful at the margin of getting people to think about what money is, how we use money and where it's going to go, which is again a a sort of separate topic. Um, and indeed I kind of see it that way. I think it's your training wheels for the the central bank digital currency system, which lies ahead of us. So, I I just don't think there's any relationship really at all in terms of price action.
>> Have you ever owned any crypto yourself?
>> I I a long time ago.
>> And you sold it?
>> Yes.
>> Why?
>> Because I don't like to be my personal investment style is I want to be early. Uh, and I don't want to be there for the last two months of the pregnancy. I'd rather be there right at the beginning. Um, and then once once I I reach the point where other people are starting to get excited and jump in and there's a kind of critical mass feel, that doesn't make me feel comfortable. This is a genuine contrarian thing where I don't want to be that guy.
>> really interesting. I mean, is that not where we're not late stage in gold? I mean, again, the very fact that everyone has power
>> stage from several thousand years ago or or what do we mean by that?
>> Okay, well, on on a decade time horizon, for example, um haven't we just had a phenomenal surge or more to the point haven't we just had a phenomenal 4 years where a lot of people they might not have got to 25% of their portfolio in gold, but a lot of people are now aware of the need to have hard assets. They're aware of the debasement conversation, so much so they've driven crypto assets much higher.
>> but but you're you're right to use the word aware. So, there is a change in awareness or about gold and silver price action. I have seen that. There is definitely that, but no one's There's been no FOMO. No one has been dragged in or anything like that, you know. In fact, while other assets have been going up, there's been a sort of look across and just a pat on the shoulder and good for you that that's that that's going up. But but but crypto is used as a speculative instrument to make short-term gains. Whereas gold, you know, talking about late cycle, I mean, gold is simply there to protect your purchasing power. Now, unless we're suggesting that the Turkish government, sorry to keep going on about the Turks, um or or ours, more salient in light of of where we are today, or that the Americans they are going to protect your purchasing power on a 1, 2, 5, and 10-year basis looking forwards. There's no cyclical component to that. Governments always do that. They debase your your purchasing power. It's the nature of the state and the way it grows and the way it wants more more involvement that really your local currency goes down. There are breathers on the way, but but the direction is always the same.
>> So, what is your argument to a young person who is aware of the debasement argument
>> Yeah.
>> And inclined to buy Bitcoin.
>> Uh what would be my argument to to stop them doing that and make them buy gold instead?
>> instead.
>> Um look, I think it's just a trader versus an investor mentality. I mean, that you own gold and silver because you're you're thinking about this over the long term, whereas you might want to trade Bitcoin as a a way to fund your holiday. I mean, I just don't think they're the same.
>> Um let's touch a little bit more then on how you position your strategies. Because we touched on this at the top, you have physical and you have equities and obviously have gold and you have silver. Is the balance between those always the same? Does it change with the moment in time and and how you thinking between the two at the moment?
>> Yeah, no. So, um look, I think that uh the first thing to say is that you I don't like being style fixed. So, I think there's always moments where you want more of something and less of something else, which isn't necessarily always the way that people in in my industry think. They tend to quite a lot of people are quite style fixed. So, I think there's moments for more physical. That's generally when real interest rates are trending higher and your local currency is doing well and having a bounce. You don't want as much beta. Don't necessarily need to own mining stocks. Uh and likewise silver because that's a a higher beta um version of it. But the way I think about this is de-risk. Think about the risks. And think about the non-obvious risks. Deal with those and then start to add in to the portfolio what you think are optimal instruments. So, for me um when I think about mining companies, you've got a whole suite of different options. But where are then where are the non-obvious risks? And the first one is geography. It's not really to geopolitics, by the way. This is much more to do with operating risks. You know, do they have good roads, services, logistics, equipment, trained labor? Uh you know, are the regulations clear? Can one operate having one's arms around the risks. Uh so so my first thing is I I really only want to be in tier one and tier two mining jurisdictions, but I do want to add return using silver. And I particularly like silver development assets because we have a very big structural problem with silver. If you want more TV screens and green tech and all the stuff that's assumed to be coming, we need a lot more silver. Not a bit more and you've heard about copper. The problem is way bigger in silver. It's a much much bigger problem than in copper. It's not spoken about as much, but it's a bigger problem. So if I can invest in a uh silver development asset, so non- not making any money at the moment, have a large stake in a good jurisdiction where I feel confident that this will become a mine, I'm able to invest in that on a heavy discount to a producer, and by the way, the producers have never been cheaper than they are today, ever. So we're already talking about the the the cheapest entry point on a valuation basis, and then with the development company, people really don't want to own those cuz they're not making money yet.
>> So just explain that to me because obviously the the producers had a great run-up over the last 18 months as did the underlying gold price and silver price. They are so cheap on a PE basis simply because the price of the underlying has risen much further than than their share prices.
>> Exactly exactly right. So while they have gone up, um there has been actually been negative float space over that time frame as amazing as that may seem to you. So these are the most profitable companies in the world, 50% free cash flow margins, making making probably double and in some cases triple the free cash that tech is making. But not only are people not investing, they're divesting. So what happens is your valuation actually just go down. While they're going up nominally and the stocks are doing well, what you haven't had is that participation, that flow from the wider market.
>> So so just how tied are they to the price of the underlying? So, if you're wrong
>> Oh, completely. They're completely tied to it. Yeah, yeah. No, so so look, so let's say we go into a a deflationary bust for 3 months. That's real interest rate positive. That's bad for gold and dollars. That will lead to a sell-off. Even though these things are as cheap as they've ever been and more profitable than ever been, they're still going to go straight down because ultimately your marginal user of those instruments at the moment is a leveraged a leveraged player, not only. So, if I'm if I'm a hedge fund and I'm thinking, right, we've gone into a short-term deflationary bust, am I going to short GDX? Maybe. I mean, I wouldn't, but um would they do that? Yes, probably. Because you're going to get a beta version of that trade.
>> And and just give me it's it's a blended average of the producers in your portfolio. What is the PE multiple or whichever multiple you care about most?
>> net asset value metrics are the ones that matter most and gold producer trading at 0.7 times NAV. Now, 8 years ago with um free cash flow margins of 10 15%. They were already cheap and trading 1.5 times. They're now they're now 50% cheaper with triple the free cash flow margin that they had back then.
>> And and how quickly does that change if prices are 20% lower than you expect?
>> Well, I mean, again, it depends. It depends on flow. I mean, it dep- depends on flow dynamics, but it's just been a very slow grind and a lot of this is to do with how um long only investors use the um the extra budget in their portfolio that lives outside of benchmarking because of course, you know, most portfolios are the same and then you've got your extra. And and this is so trending, you know, it's all about what is the hot thing at the moment and it is still AI tech, double tech, triple tech. That's where that capital sits. You know, it makes me excited because I think that at some point that will want a new home, particularly if that starts to not do as well. At which point I think the fundamental case and the fundamental story for gold and silver miners becomes, you know, very compelling very quickly because it's very likely that if the equity market does go lower, then that creates a more dovish background, which is the fuel for the space I invest in. So, you see a very big decoupling then of performance between the wider equity market and this particular part of it.
>> Um just dwell for me then on rough splits of the underlying commodity, the producers, as you say, the sort of safer equity, and the and the sort of more diversified
>> like to think about it is broadly you you have your cash bucket, which is for me is bullion as is cash. Um and and and sort of 15 20% there. Other end of portfolio is similar amount in what you would call development and maybe even a little bit of exploration. And then the body of the portfolio should be these these heavy free cash flow producing um companies. But for me always a split between gold and silver because I think that silver has kind of open-ended optionality uh to the upside. Now, while I have seen periods of sell-offs where silver has a beta of sort of two two and a half to gold, I've never seen it more than that on the way down. But on the way up, it can really open up and go to four and five. So, I like that um that spread.
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There's often a big picture point to commodities, which is, you know, the cure for high commodity prices is high commodity prices. You draw more money into the the mining assets, and and more is discovered. Does that apply to gold and silver as much as to other commodities? And do you understand the argument for Bitcoin over gold and silver when when that argument comes up?
>> Yeah, I mean, it's just not it's just not how it works for gold and silver. Gold and silver are are There's lots of reasons why it's not the same, but firstly, yes, silver is a commodity, but it's it's an FX instrument. These things are are FX instruments. And what's more is they also have a Giffen good style um behavioral component. So, just to sort of go back and look at that. What that means is the more it goes up, the more people want it. So, it's not like it's not like commodities um really at all in that way. And particularly in Asia, the the price point starts to go higher, and it drags in more and more because it really there is a it is something that you own out of desire to be out, rather than a desire to be in. Now, if gold and silver still traded like they used to do before everything changed really in the system in in the early 1980s, they were more like open outcry commodity markets. They're not now. They became entirely financialized in the early 1980s to create this massive and entirely opaque wealth over-the-counter foreign exchange version of gold and silver. It's like I mentioned earlier, that creates sort of um pressure that way, where as people start to become interested, they start to question the nature of their exposure going, "Do I own real gold? Do I own the promise of gold, or do I own nothing at all?" Um and that that's So, that's why behaviorally they're not like commodities. Now, go back on Bitcoin. Look, um Bitcoin investors have done extremely well. And I remember going uh on a on a um on a TV show 15 years ago when silver hit 50 and talking about how silver was great at 50. And there was another guy that went on with Bitcoin at a dollar. Um I I mean, adjusted for inflation, silver now is down like 70% from that moment. Um and Bitcoin's up sort of 50,000% or something. So, look, Bitcoin investors have done very well. But, for me, like I said, it's so full of of of speculative capital already, it's just not my not my thing.
>> Um You mentioned We talked there a little bit about where is the gold for the miners looking to to find new gold. Let's talk about the other question, where is the gold that's already been mined that you raised earlier. Set up the sort of conspiracy theory here a little bit for us.
>> So, there's no conspiracy theory. It's just the nature of the of of of I mean, so I'm going to I'm going to throw that back at you and go, "It's called banking wealth." I mean, you know, is banking a conspiracy theory? It's just banking. That's just That's just what it is. The problem is people don't understand banking. They don't They think they do, but they don't. You know, it's a fractional reserve system. There is a massive amount. We don't know how much because we don't get the data. The gold silver market is so sensitive um to central bankers and policy makers, always has been, that this is the one area you don't get good data. But, we do know there is a monumental over-the-counter daily market, which is unallocated. And um that creates a situation whereby could there be a run where people turn around and go I want my gold? Well, the ECB as I told you even written a research note saying this carries systemic risk. Cuz of course it does. It's not like government issued money which apparently you can just print and tip in the top. You know, it's a structural point. But there's nothing new here. That's that's how everything around us was built. The model of I have an ounce of gold, I walk around the block and the banker says I have 20 oz of gold is how everything was built in the first place. It's the relationship between the one and the 20 or the 200 and the depositor and the system and people's vigilance thereof. You know, and in fact I'll tell you everything you see around you is a reflection of the lack of vigilance on this point.
So so just to expand on that for for me a little bit that the bull case or what could suddenly drive a squeeze a higher in the price is is what is central banks around the world saying do you know what London or Fort Knox or whatever, I actually want to take delivery of mine. Or is it or is the owner of the ETF somehow claiming that they want it?
So look, I'm I'm I'm chuckling here because um central banks and the way the investors think about central banks is a classic example of do as I say and not as I do. You know, they they've been doing that, Wolf, ever since QE started. They've been getting their gold back from each other and going I think I'll keep that at home now. Because they recognize where we are in the long cycle. So they've all done it already. They're already there. They've already repatriated their physical reserves. They don't own paper, they're in the real stuff and they've already moved it home. It's the financial system. Think about it like um the the modern system is like a golden Range Rover with a huge um sort of trailer um caravan behind. The financial system is the caravan. It's been pulled along by the by the golden Range Rover. But they they unhooked it a while ago and drove off. The financial system is completely unaware of this point or uninterested in it or both. And continue to operate as though US Treasuries are the risk-free. When the central bankers have shown you for well, that's not the case.
>> But is the comparison you made earlier to to potential bank run legitimate because for example, an ETF lots of the products, the ones you own or potentially own they are physically backed. So it does it does exist one for one.
>> Look, the ETF market is is a sort of one component of a much much bigger problem. Um the the issue here are obligations of gold. The ETF market is um is not my favorite with respect to this particular topic. And the reason is because I think we're talking about risk-free and in my view the the very limited amount of risk-free collateral in the modern system. And then an exchange-traded product, that's oil and water. They're not they're not suitable in my view to be blended together. I think that you should be taking more of a um a ruthless approach towards counterparty risk in the way you go about this. But remember that the physical market is like 3% of daily turnover. This is the point I haven't made yet so far. Sorry. It it the the the gold market as best we know it within the London Bullion Market Association system is about a half a trillion a day. It's a massive massive global foreign exchange market. That does not capture a huge amount of gold business that happens in Asia outside of that where they willingly buy and sell paper gold. The interesting thing about in Asia is they actually call it that. So I was I always find fascinating with them. I thought I find it very amusing. I go, "So you actually call it paper gold?" They're like, "Of course." Um and then I and I go, "Well, we call it gold." And this is the point. You know, that this this the the entire physical market is is just a tiny component of the overall market. Now, the ETF market is within that small bit. As are the central banks. As are you when you go to the bullion dealer. It's this monstrous derivative wrap around it that's the issue.
>> In light of all of that, if I want to protect my wealth for the long run,
>> Yes.
>> why shouldn't I just buy a physical gold bar rather than your fund?
>> should You should absolutely do that. Indeed, not but you but physical gold is absolutely right. So, I always say this, which is you want to If you want to approach this topic, think of it like a cake. Now, I reckon that that my the way I think about cooking um and my particular cake is quite eccentric and way better and I use the best ingredients and la la la. And it has the nice sparklers on it and whatnot. But, in order to have a cake, you have to have something to put it on. What are you going to do? Hold it? It needs to be on something. And that for me is direct physical gold and silver investing. Now, actually bars are are taxable. Whereas, depending on where you are in the world, you should investigate your local your local coin. So, in the case
of a UK investor, we have Britannias and Sovereigns, and they carry special tax treatment due to their monetary nature. Whereas, when you go buying bars or investment products, your your you're being treated in a different way, um, in terms of what that means on disposal.
>> Another sort of confusing but fascinating topic I wanted to touch on is the gold that the US government has. And so, just explain this to me. This is priced at what level?
>> Uh, I think it's $42 an ounce.
>> Compared to the what, 4,200 or thereabouts that we're at today?
>> Yeah.
>> So, why is it still priced at that level?
>> Well, it's a legacy of, um, I mean, this is now sort of history lesson time, but, um, look, everybody came together after World War at Bretton Woods to discuss the the loans that had been made during the war, um, and what the system would look like after that.
The first thing to say is, during the war, an enormous amount of gold ended up in the US out of out of flight. So, a lot of gold crossed the Atlantic to go to America to be looked after. Um, and as Donald Trump tweeted not so long ago, or it was quite a long time ago, a couple of years ago: "He who has the gold makes the rules."
We all turn up at at in New Hampshire around a table, and the Americans cracked their knuckles and went, "Now then, lads. The, um, we seem to have all of your gold."
So, the The Bretton Woods agreement was, of course, that the the the dollar would be used in international trade clearing, but the that it would be backed and redeemable at $35 an ounce. Now, that got adjusted up to, I think it's, 42. Forgive me if I've got that slightly wrong. You learn you be by a little bit. Um, and then in 1971, Nixon closed the gold window. So, he went on television and said, "We, we are temporarily suspending the convertibility of the dollar. We are still in a temporary suspension of Bretton Woods now."
Should the US do what I think they will do, which, and I, and I know you did ask him, and they, and they, and they mark their gold reserves to market, the way I would interpret that is that is finally the end of the post World War II system. We are still in it. That that one point, which is there, it's a temporary suspension of the agreement, is what keeps the whole thing together. Uh, if they do mark their gold to market, then all governments and central banks are on the same page. They're on the same level. So, in other words, movements higher for the gold price on the reserve side of government central bank balance sheets is beneficial. If gold was twice where it is now, the US is not getting the benefit, and other central banks are. It is a It is a very big topic, but there's a lot more going on here than people realize.
>> But I guess the the the short question is, what's the incentive to Scott Bessent, who, as you said, I asked about this and he dodged it?
>> Yeah.
>> Or Kevin Warsh to do that revaluation?
>> Um, insolvency. The point is, there comes a moment where where it benefits all governments to have a massive check through the post, surprise check through the email going, "Oh, you just got 10 trillion on the asset side of the balance sheet." Because that resolves the resolves it, but it massively mitigates the the insolvency problem that governments have got. But that can't happen until the Americans are on the same page as everyone else. Now, you might ask, but how would that happen? And the answer is what we've been discussing, which is when people start to go, "Where's the gold?" Of course, governments have got it all. They're fine. So, if there's a scramble, they're sat there like Austin Powers going like this as that side of the balance sheet just goes straight up. So, so I think the Trump Fort Knox thing is is related. The idea that the president and and all these other people would question the existence of their own reserves is quite bizarre.
>> So, so, ex-expand on that for me.
>> Well, I mean, those of us in the gold community think think that quite a long time ago the gold was moved elsewhere anyway, um, and that Fort Knox is a bit of a shell game. There's not much going on there. Hasn't been for a long time. So, should he go there and open it up and be proven right, which I'm sure President Trump would quite like to be proven right, um, seems to be one of his favorite things, then you would have the condition that the ECB warned about in their research note, and and I've been inferring, which is, people get, "but wait a minute, where's my gold?" And if you're a rich oligarch and you ring up your Swiss banker and go, "Where's my gold?" And they go, "What do you mean?" Um, you know, you have a sequence of events there which results in a much higher gold price. And of course, that's not really what's happening because gold is the thing that's pricing everything else. But it's a, it's, it's the only way, gold is the, is a fire extinguisher of government balance sheets. It always has been. But there has to be, it has to happen at the right moment. It can't just happen forthwith. There needs to be a catalyst for it.
>> Why do you think that there's nothing in Fort Knox already?
>> Because there's very few people work there. And there's, it's a been a long, it's been a long, an off-discussed topic that the gold got moved from Fort Knox to West Point military facility several decades ago. Um, I don't know whether that's right or not. Certainly, there are plenty people who subscribe to the story, and and and over in in America that that say that's the case. I don't think it makes much difference whether it's in Fort Knox or West Point. I mean, that's not, that's not it. But should there be an audit? Judy Shelton's very interesting on this, by the way, because she not only, she wants it. You know, Judy, not only does she want it, but she speaks, she speaks the most important language surrounding this topic, which is not only should these bars be audited, do they exist, but they should also be checked for encumbrances, which is really the more important point. Presuming they're all there, who owns them? How many times over have they been leased, loaned, swapped into the system? There's one thing that is there, the other thing is, who's how many post-it notes on each bar? They'll never do this, by the way. Governments are not, it's not in the interest of any governments to do this. Far more, far more in the interest of governments is for them all to agree that each other have the gold at a much fancier price and they get their balance sheets resolved.
>> Really fascinating, fascinating stuff. Be fun to visit Fort Knox.
>> Yeah, I know. Agreed. I'm not sure we're going to get. You might get invited actually, but I'm pretty sure I won't.
>> Um, yeah, maybe. We'll see what we can do. To start to to round things off, um, as we're we're race through time, as as ever is the case.
>> Case. For those that haven't bought your fund physical gold, physical silver yet, and they look at the market, I mean, we are essentially, I know you probably don't like these definitions, in a bear market for gold. Right? We're down 20%. The momentum hasn't been great of late. Why is now the time to buy?
>> Well, I'm definitely not, um, I'm not here to to to give specific timing advice, but what I would say to you is that the the depth and time of this correction is exactly in line with the two biggest previous moves you've seen into the space. So, one was in the 1970s, and the other was 2006. In both cases, you had a very big initial move and then a correction of exactly this depth, and, um, and then on they went from there. But, I would say, to answer the question in a more, um, helpful way, this is this is about being short the behavior of your of your government. I mean, if you think they're going to be disciplined and they're going to look after you and they're going to raise rates above inflation and give you a real return on your cash, then don't do it. But, if you like me are,
>> On the day that Kier Starmer resigns,
>> less confident that that's the case, that the history of money tends to suggest one thing, which is you're better off owning gold and and or silver versus your local currency.
>> So, just on the government point, I mean, clearly here, looks like Kier Starmer will be replaced by Andy Burnham. Either way, someone who's not more fiscally conservative than him. That seems reasonable. What if the next election comes around for a relatively small country like ours now, and a very fiscally conservative government wins an election? Mhm. Is that enough to change your view on the direction of travel or not?
>> Well, the the difficult point is, we're talking about two different things, cuz if you now ask me about the sterling gold price, which which I'm exposed to personally, cuz I own, you know, gold coins. Which which are relevant to me in sterling. But, the,
>> Okay, say that happened in the US, too.
>> Okay, so in the US, it's is more because because everybody obsesses over the US dollar gold price cuz of its importance within the financial structure. Let's say yes, you get a, um, a a very conservative and disciplined president suddenly comes in. Um, my my observation to you would be the way that things are now and the way everything within the financial architecture is now, this would create a an ugly deflationary problem, which would be responded to the other direction very quickly. Um, and and the best couple of examples of this would be '08 and then COVID. So, the half-life of policy response is collapsing. In 2008, we went, you know, off the cliff we went. It took, I think it was, 9 months before we got the policy response. So, we were in a deflationary hole, and gold and silver did poorly during that period for that same reason. Real interest rates were up, gold and silver went down. And then you got your policy response, which is dovish and the reverse. And in COVID, exactly the same thing happened, except it was a 2 weeks before the policy response. My sense is that if you got a deflationary outcome, whether it's through markets or a politician, the implications are very, very bad for a lot of assets. I don't think you would even need a policy response. I think the market will deliver the response anyway. I don't, I think, I think the the the bond market will assume a response immediately. You might get a one or two-day air pocket, but the idea that that that policy makers and those in charge of the monetary system will just sit back and allow a huge liquidity problem, I I just don't see that. Um.
>> Quick final question on this, on timing. If we do see a big equity market correction led by the the the triple tax as you describe them, short-term gold and silver correlates with that or not?
>> Well, so, no. My my my view is that as soon as that happens, you'll see the the the cash and bond market go dovish. It will will go back. So, so those seven cuts that disappeared to a hike, yeah, you'll start to see that collapsing back the other direction again, which is which is fuel to the upside rather than the other way around.
>> Um, and final question that I flagged this to you in advance. Uh, we're really out of time now, but what is your overriding piece of investment advice for our listeners?
>> I think that that my overriding piece of investment advice is: don't ignore the importance of the monetary system. I don't think that people think about this very much. They think about assets, um, and increasingly in the in the world we live in with a momentum bias, but just just have in mind that flow, monetary flow in and out, liquidity is is your your friend a lot of the time, particularly way things work now, but, you know, it needs hedging. Um, or or you should consider hedging the risks of that point.
>> Uh, Ned, it's been an absolute pleasure, uh, to catch up with you today. Thank you for joining us here on the M.O.A.S.S. podcast.
>> Thank, thank you for having me on.
>> Ned Naylor into the Jupiter gold and silver strategy with us there. Make sure to hit follow or subscribe if you haven't done so already, uh, to receive our next episode, which will be with Anthony Scaramucci of SkyBridge Capital. That's coming up next week here on The Master Investor podcast. For now though, our thanks again to Ned Naylor.
>> Thanks, both.
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